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AUTHORIZE SECOND AMENDMENT TO THE DOWNTOWN INFRASTRUCTURE INFILL INCENTIVE REIMBURSEMENT AGREEMENT WITH OPEN WINDOW PROJECT LLC
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RECOMMENDATION
It is recommended that the City Council adopt a resolution:
1. Authorizing a Second Amendment to the Downtown Infrastructure Infill Incentive Reimbursement Agreement with Open Window Project, LLC, to increase the total reimbursement amount to $6.18 million and make the funding non-contingent on the City’s annual budget approval process; and
2. Authorizing the City Manager to take necessary and appropriate actions to carry out the purpose and intent of the resolution.
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Summary
In October 2016, the City Council authorized a Downtown Infrastructure Infill Incentive Reimbursement Agreement (Reimbursement Agreement) with Open Window Project, LLC (OWP) of up to $3.8 million to assist with Phase I of its Open Window Project Master Development Plan. Of this amount, $2.7 million is allocated to the project and $1.1 million is approved for the project but subject to Council allocating the funds in the annual budget process. The developer has spent significant funds in predevelopment efforts and requested that the City release $760,000 of funding already committed pursuant to the Reimbursement Agreement. To release the funds, the City Council authorized an amendment to the Reimbursement Agreement on May 9, 2017.
OWP is now requesting an additional $2.38 million, for a total of $6.18 million, to offset the increase in public infrastructure improvements due to a larger project scope for Phase I. A Second Amendment to the Reimbursement Agreement is necessary to approve this additional funding request, as well as to make modifications to comply with certain requirements the U.S. Department of Housing and Urban Development (HUD) is requesting of the developer, OWP. Those modifications include removing the contingency that funding be based on the City’s annual budget approval process.
The remaining balance of $3.48 million ($1.1 million of previously approved funds but subject to the annual budget process and the new request of $2.38 million) will be funded with future dollars received by the City through loan repayments of the Successor Agency to the Community Development Block Grant (CDBG) fund and/ or the City’s annual allocation of CDBG funds. To make the additional funds requested not contingent on future budget approvals it was necessary to identify a non-general fund source for future reimbursement. The additional CDBG dollars received from the loan repayments from the Successor Agency are anticipated to be sufficient to cover the future costs.
DISCUSSION
Background
In July 2015, the City Council approved the Downtown Infrastructure Infill Incentive Program (Program), in an effort to encourage infill, mixed-use development in Downtown Stockton and to defray the cost of public infrastructure. The Program provides up to $900,000 annually, on a reimbursement basis, for public offsite infrastructure improvements associated with eligible downtown infill projects. Eligible projects must consist of a minimum of 35 market-rate housing units and/or a minimum of 30,000 s.f. of new, or newly renovated, retail or commercial space. The applicant must also make a capital investment of at least $500,000, and eligible public infrastructure improvements must equal $100,000 or more. The Program was approved for a ten-year period and will sunset in July 2025 unless extended by the City Council.
In February 2016, the City Council approved a Master Development Plan and Development Agreement with Open Window Project, LLC for its Open Window Project (Project), which encompasses approximately 15 square blocks within the Downtown Stockton core. The Project is a mixed-use development that consists of approximately 1,000 residential units, 90,000 s.f. of commercial space, and 110,000 s.f. of industrial/art studio space.
In October 2016, the Council approved a Downtown Infrastructure Infill Reimbursement Agreement with OWP (Attachment A - Resolution 2016-10-18-1204), which provides for an initial reimbursement to OWP of up to $1.8 million for public offsite infrastructure improvements. Per the Reimbursement Agreement and subject to future City Council appropriations of up to $900,000 per fiscal year, the City Manager was authorized to execute future reimbursements up to an additional $2 million, the total reimbursement not to exceed $3.8 million.
In May 2017, the Council approved an amendment to the Reimbursement Agreement (Attachment B - Resolution 2017-05-09-1103) authorizing the release of $760,000. Prior to the release of funds, the City placed a lien on seven (7) properties owned by OWP as security until such time that the developer has secured its financing or building permits have been issued for both the public infrastructure improvements and Phase I of the Project, whichever occurs first.
Present Situation
The Reimbursement Agreement outlines specific thresholds that must be met for reimbursements to occur. The first payment of $760,000, which is 20% of the $3.8 million, was made upon the execution of the amended Reimbursement Agreement and recordation of deeds for the properties mentioned above and approved by Council last May. The balance is paid out in increments based upon completion of construction (20%), issuance of a Certificate of Occupancy (30%), and filing of a Notice of Completion of the infrastructure improvements (30%) as identified in the Reimbursement Agreement. Funding is contingent upon City Council appropriation during the annual budget approval process each fiscal year. To date, $2.7 million in funding has been appropriated by the Council, leaving $1.1 million subject to future budget allocations.
Phase I of the Project has increased in scope from its original plans which consisted of 92,400 s.f. of commercial space and 200 residential units, 150 were to be market-rate, spanning several city blocks in Downtown Stockton. While the commercial space will remain the same at 92,400 s.f., the residential component of the project has grown significantly to 261 housing units, of which 231 will be market-rate, and encompasses an additional city block.
The added housing units require considerable infrastructure improvements above what the Council initially approved nearly a year ago. This includes the remediation of an underground storage tank in public right-of-way adjacent to 216 N California Street, which is currently owned by the City’s Parking Authority and on which Ten Space holds an option to purchase. Further, additional infrastructure improvements have been identified, such as underground infrastructure replacement, new sidewalks, undergrounding overhead utilities, street repairs and repaving, and other right-of-way fixtures (streetlights, benches, etc.).
As such, OWP is requesting an additional $2.38 million in Downtown Infrastructure Infill Incentive funding to cover the increased offsite costs mentioned above for a total of $6.18 million. OWP provided an engineer’s estimate of the improvements, which is attached to the Second Amendment to the Reimbursement Agreement (Exhibit 1 to the Resolution). Under the current Program guidelines, the revised Phase I scope is eligible for up to $8.1 million in funding.
OWP is undergoing underwriting for $65.96 million in financing which will be backed by HUD’s 221(d)4 loan program specific to urban, mixed-use projects in distressed communities. As such, the Reimbursement Agreement must also be amended to meet specific requirements of HUD to ensure that the $6.18 million will not be contingent upon the City’s annual budget approval process. To date, $2.7 million has been allocated towards the Reimbursement Agreement. The remaining balance of $3.48 million will be funded with future dollars received by the City through loan repayments of the Successor Agency to the CDBG fund and/or the City’s annual allocation of CDBG funds. To make the additional funds requested not contingent on future budget approvals, it was necessary to identify a non-general fund source for future reimbursement. The additional CDBG dollars received from the loan repayments from the Successor Agency are anticipated to be sufficient to cover the future costs. All third-party reports have been received (market study, appraisal, and Phase I environmental) and underwriting is nearly complete. OWP is anticipated to break ground in November of this year.
The additional funding request to OWP for Phase I of the Project is an important element in closing the financial gap and staff is requesting that the City Council approve a Second Amendment to the Reimbursement Agreement allocating an additional $2.38 million in Downtown Infrastructure Infill Incentive funding and removing the annual budget approval requirement.
It’s important to note that the developer, OWP, is making a major investment in Downtown Stockton with a total cost of $67.5 million for Phase I of the Project.
FINANCIAL SUMMARY
To date, $2.7 million has been allocated towards the OWP Reimbursement Agreement and has been encumbered within the Economic Development account number 010-1760-510. The remaining balance of $3.48 million will be reimbursed in equal installments of $900,000 in fiscal years 2018-19, 2019-20, and 2020-21, with the remaining balance of $780,000 reimbursed in the fiscal year 2021-22. Future dollars received by the City through loan repayments of the Successor Agency to the CDBG fund and/or the City’s annual allocation of CDBG funds, will be used to fund the $3.48 million.
Attachment A - Resolution No. 2016-10-18-1204
Attachment B - Resolution No. 2017-05-09-1103